Mothercare says times remain tough as financing talks begin

Mothercare shares plunged in early trading on Friday as the mother-and-baby-products brand owner issued a bleak trading update for the 53 weeks to the end of March. But there were multiple reasons for that sharp share price drop beyond weak sales.

Of course, a double-digit sales decline was a key factor. The update showed a 13% fall in unaudited net worldwide retail sales by franchise partners. Those sales dropped to £281 million and the figure looked even worse given that the comparison period in the previous year was only 52 weeks long.

That said, adjusted EBITDA for FY24 should be marginally above the £6.7 million achieved in the previous year and in line with market expectations. We’re told that this shows “a continuing year-on-year improvement in the underlying profitability of the business”.

So what about that sales fall? The company said it narrowed to just an 8% drop at constant currency exchange rates.

But it was a drop nonetheless. Its Middle East markets (accounting for 41% of its total retail sales) “continued to be the most challenging, particularly in the latter part of the financial year”.

By contrast, the UK and Indonesia operations were among the markets that increased retail sales year-on-year, with Indonesia growing to become its second largest market by retail sales behind Saudi Arabia.

The outlook for future trading would also have been a factor in the share price fall. It said that as previously reported, in addition to the global economic uncertainties that have been hurting its retail sales, in many of its territories its partners are still clearing inventory due to the suppressed demand during Covid-19.

The company said it expects these factors to continue to impact its results in the current FY25, “notwithstanding ongoing improvements in product and service, although our medium-term guidance is unchanged for the steady state operation in more normal circumstances”.

It also continues to believe its ongoing franchise operations “remain capable of exceeding £10 million operating profit and maintain our focus on accelerating our growth in both existing and new markets”.

A third and important share-price-suppressing factor is that the company has begun refinancing talks with its lender to “vary, renegotiate or refinance” its debt facility. The interest rate on its debt facility is over 19% and its existing loan facility remained fully drawn across the year. Couple with the extended time to return to pre-pandemic retail sales levels, particularly in those Middle Eastern markets, means Mothercare requires waivers to its covenant tests.

The company said it’s “well advanced in looking at various financing alternatives (including equity and equity-linked structures) to give us both additional flexibility and reduced cash financing costs. For the avoidance of doubt the group does not require (and is not seeking through this refinancing) additional liquidity”.

Chairman Clive Whiley seemed reasonably update in the circumstances: “As highlighted in my last Chairman’s statement, it has been six years of hard work and transformative change for the group… The resilience we have built into the business throughout this journey, allows us to deal with the major challenges we have faced and Mothercare operations would not be in the profitable and cash-generative position we are today without it.

“Given the exogenous factors influencing some of the company’s operating markets, our immediate priority remains to support our franchise partners, ultimately for the benefit of our own business, however we have also redoubled our efforts to restore critical mass and are focused upon monetising the Mothercare global brand IP. This remains an exciting prospect for our partners, our colleagues and all stakeholders.”